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Electronic Arts' Brighter Future

The company acquires Criterion Software, which has a development tool for creating games.

Electronic Arts(NASDAQ:ERTS) has a history of making smart acquisitions and creating best-selling franchises out of successful titles. Its purchase of Medal of Honor maker DreamWorks Interactive in 2000 has led to millions of sales from the game and its sequels. Origin, bought in 1993, ultimately provided EA with Ultima Online -- one of the first subscription-based games -- whose seventh anniversary edition was released this year.

EA's acquisition of Criterion Software on Wednesday, however, is not so much about obtaining a new game that will fly off the shelves. The highlight of the purchase is RenderWare, Criterion's development tool for creating games. RenderWare is a piece of middleware -- it provides a framework that standardizes the game development process and allows rapid prototyping over multiple platforms (all three major consoles and the PC).

RenderWare is widely used in the industry. Its user list is a veritable who's who of the gaming industry, with companies like Activision(NASDAQ:ATVI), Sony(NYSE:SNE), and THQ(NASDAQ:THQI). Criterion estimates that a quarter of the console titles in development today use RenderWare technology.

EA's competitors will understandably be apprehensive about this deal. Having to license RenderWare from EA would smart, but it is the least of their concerns. The acquisition allows EA to combine RenderWare with its own in-house tools, cutting production costs and reducing time to market. In an industry where production costs for top titles are in the millions and release schedules are a joke (Activision's upcoming Doom III was originally scheduled for release two years ago), access to Criterion's crown intellectual property will be a strong advantage.

While the move will benefit EA immediately, this acquisition will pay off the most in the future. Criterion is already working on the next incarnation of RenderWare, which will work with the next generation of consoles planned for 2005 and 2006. Being able to train developers on the new software early will give EA a tremendous head start.

With upcoming titles Madden NFL 2005 and The Sims 2 having tremendous pre-order sales, and technology for high-speed development when the next-generation consoles are released, EA's future both short term and long term continues to look bright.